Today is the fourth anniversary of the TSN Turning Point of the Financial Crisis.
On Oct. 10, 2008, a Friday, the Group of Seven finance ministers and central bank governors, meeting in Washington at the Treasury Department, got serious. Facing a financial calamity in the wake of the bankruptcy of Lehman Brothers Holdings Inc., ministers scrapped the turgid prose they had been serving for years and delivered a concise five-point plan to avoid a global depression.
Several things happened that day.
Finance ministers and central bankers showed that governments alone have the ability to calm the chaotic global financial system; stock prices around the world surged when markets reopened after a weekend of declarations from the G7 and other global financial leaders. After a period of nonchalance marked by deregulation and the rise of free trade, politicians reasserted themselves in the economic affairs of their countries in a major way. The co-ordinated fiscal and monetary stimulus that would follow saved the world from a depression.
The G7 – the United States, Japan, Germany, Britain, France, Italy and Canada – also accepted at that meeting that the world economy had grown too big for its members to control on their own. The G7’s crisis plan was given heft by the group’s willingness to seek out the endorsement of the larger Group of 20, which included big emerging markets such as China and Brazil. In doing so, the G7 ceded its unofficial role as the global economy’s steering committee, as the G20 became the focal point of global economic governance.
It became fashionable to talk about a new world order. Gordon Brown, the British prime minister, mused of a new Bretton Woods, a reference to the global compact that created the International Monetary Fund and the World Bank at the end of the Second World War. The G20 said it would design a voluntary system that would keep its members from implementing economic policies that harm the global good. The IMF would become the arbiter.
The goodwill didn’t last.
With the fire of the financial crisis quenched, nations turned inward. Europe failed miserably to control its debt crisis, and the rest of the G20 refused its requests for aid. The IMF eventually rounded up more than $450-billion (U.S.) for its crisis-fighting arsenal, but over the protests of the United States and Canada, which argued the money was a backdoor bailout for rich European nations. The U.S. government has been made impotent by political gridlock. Brazil characterizes the Federal Reserve’s attempts to jumpstart the world’s largest economy as a “currency war.” China continues to allow adapt its currency policy to free-market principles only slowly, and has done little to protect the intellectual property of overseas companies who attempt to do business there.
So what is the legacy of that fateful G7 meeting?
At a minimum, it is clear that global economic institutions, so often maligned, are capable of great things when faced with present danger. The trust and recognition earned from all those meetings matters.
But for those who long for something more than a volunteer fire department, the wait continues. The achievements that restored faith in the G7 and the G20 were not only done in the face of disaster, but at a time of domestic political quiet among the leading economies. Leaders made bold decisions knowing they wouldn’t have to face their electorates right away. And when they did, things didn’t go so well. Mr. Brown is gone, as are French President Nicolas Sarkozy, Italian Prime Minister Silvio Berlusconi and several other crisis leaders. President Barack Obama’s Democratic Party took a beating in mid-term congressional elections in 2010, and Mr. Obama has been playing defense ever since. China now is the middle of a political transition of its own.
The G20 agenda hasn’t come to a complete stop. The overhaul of international financial regulations is struggling under the weight of leaders’ ambitions, but hasn’t stopped – just ask the chief executives of the world’s biggest banks. But that’s in large part because it’s relatively easy to sell tougher measures for banks to voters at home.
It’s a different story when the IMF puts out a call for cash, or the G20 demands changes to currency policies that would help the global economy but hurt domestic exporters. Paul Jenkins, the former No. 2 at the Bank of Canada who is now a distinguished fellow at the Centre for International Governance Innovation, has suggested that global economics be made part of domestic policy debates. Until that happens, the G20 will remain a fire brigade. The G20’s ability to take preventative measures will be limited until politicians feel they can co-operate with the rest of the world without risking electoral defeat.